Targeted pricing online

Profile of a shopper

Last updated: 29 March 2016

Retailers have long discriminated against shoppers based on location (the 'Australia tax', for example, sees us paying more than our US counterparts for many products). But now, thanks to the ever-increasing data collected via online shopping, retailers can now price products based on a shopper's past buys and behaviour.

"Companies have the tools to assess the maximum price a consumer is willing to pay and the systems to charge individual prices," says Anna Bernasek, co-author of All You Can Pay, which lays out a convincing case that such price discrimination techniques are well within the reach of online retailers.

Knowing our maximum price means retailers can charge us what we're willing to pay rather than what they're willing to sell for – a tactic known as first-degree pricing discrimination.

How does price discrimination work?

An online shopper whose browsing behaviour pegs them as a bargain hunter might be offered cheaper prices or a promotion, while those who have proven themselves to be price insensitive might end up paying more for the same product.

Why are retailers employing these tactics?

The online environment has taken a toll on the traditional retailer approach, says Ron Wood, director of pricing consultancy Pricing Insight. As a result, online retailers are looking for ways to maximise every sale. And tailoring prices to individuals has the potential to dramatically increase retailers' profit margins.

In 2014, Ben Shiller, Assistant Professor of Economics at Brandeis University in the US, wrote a paper which found that if Netflix in the US used the data from 5000 seemingly unrelated web searches to individually tailor prices, it could increase its profits by 12.2%. Based on web search data, Shiller's hypothesis found that Netflix should charge lower prices to customers using the internet during daytime hours on Tuesdays and Thursdays, and higher prices to people who visit wikipedia.org.

Shiller says this sort of price discrimination "is now feasible and may soon be widely employed".

Early experimentation with variable pricing

Companies have for some time been experimenting with different pricing techniques to see what consumers will and won't tolerate, says Bernasek.

Amazon

In 2000, Amazon.com admitted to testing how pricing 68 DVD titles differently for different customers would affect sales. It claimed in a company statement that the discounts weren't based on customer demographics, and said it "varied the discount levels on a totally random basis". Following the customer backlash that ensued, Amazon.com stopped the test and pledged: "We've never tested and we never will test prices based on customer demographics."

Orbitz

In 2012, the travel booking site Orbitz experimented with a practice known as search discrimination or price steering, which involves placing different sets of products in the search results based on knowledge of the user. In a blog post in 2012, Orbitz Worldwide's former CEO Barney Harford wrote: "We've identified that Mac users are 40% more likely to book a four- or five-star hotel than PC users. A similar skew applies for iPad users. We can use that information to influence which hotels we recommend to users we see searching on a Mac or an iPad versus a PC, for example."

Evidence of price discrimination

Personalised price discrimination goes beyond both of these examples and sees a retailer charge different prices for exactly the same product, depending on the shopping habits of the customer. It's a tactic that's difficult to identify or prove.

However, a 2014 landmark study in the US found evidence to suggest this sort of price discrimination exists, although it was difficult for the researchers to determine which variables were influencing price differences. In one case, however, the researchers found that CheapTickets and Orbitz (now owned by Expedia) were offering cheaper hotel rates to members who were logged in to their websites than to those who weren't.

Aniko Hannak, one of the authors of the study and PhD candidate at Northeastern University in the US, told CHOICE that while it's difficult to know just how widespread the practice is, "the necessary expertise, technology, and data are quite accessible at this point, so any company is potentially capable of using these techniques".

Personalised discount offers

Given the potential backlash from negative publicity, companies interested in price discrimination are likely to be careful about how they implement it. Personalised promotions may be the most likely approach. A paper from the UK Office of Fair Trading back in 2013 found that while businesses were using customer information to refine pricing strategies, there was more evidence of the information being used to offer personalised discounts rather than to set higher prices.

The researchers also said they didn't find any evidence to suggest that prices were changing based on individual consumer profiles, but rather on the basis of a broader group or type of consumer. However, they did find that the technology to do this does exist.

Also known as... dynamic pricing

Earlier this year, tech giant IBM released a new pricing solution for retailers called dynamic pricing, which lets retailers change prices in real-time based on a range of factors such as supply and demand, cart abandonment rates, browsing history and competitor pricing figures.

In its white paper on the new software, IBM explains how retailers can optimise promotions for customers: "When a customer is on the retailer's website various types of information including their past purchases, loyalty status, navigation sequence and other factors can be used to assess their propensity to buy. With this information a cognitive system can determine the most appropriate promotion for that unique customer at that point in time, in essence engineering a moment of serendipity". (That would be a moment of serendipity for the retailer, by the way, not the customer.)

Airlines' history of 'revenue management'

Airlines have long been ahead of the game when it comes to dynamic pricing based on factors such as supply, demand, and competitors' pricing. It's quite likely the person you sit next to on a plane paid a different price for the same seating class. Airlines will release allocations of seats in the same seating class at different times and price points, with the idea being that the price increases as the flight gets closer to its departure date as discounted seats sell out.

It's a practice called revenue management – something the airlines have been doing for the last 40 years, says Jon Manning, a pricing expert and managing director of Pricing Prophets. "It's gone on for so long we're trained to blame ourselves [for not booking earlier]," says Manning. We're also more likely to be accepting if we can see a tangible reason for the price difference, such as an advance-purchase discount.

This sort of pricing strategy isn't necessarily personalised, but airlines are starting to realise that the extensive customer data gleaned from frequent flyer programs and credit cards gives them the ability to personalise offers. One European airline CEO, for example, reportedly told an industry conference last year he thought that it was inevitable flight prices could be based on postcodes or how much you'd be happy to pay.

How you create a shopper profile

Your online behaviour can provide a retailer with precious information about your willingness to pay. "If someone says they want something now it shows you're price insensitive," says Wood. If a retailer knows you always buy the same brand, it learns it doesn't need to offer a discount.

If you're a member of a loyalty program, it's likely your shopping patterns are being tracked. Wood says retailers track what you buy, the amount you purchase, how often you purchase, and whether or not you're a new user to the category.

A retailer may also gain valuable insights through de-identified datasets, or what's often referred to as "big data". This data about your online behaviour can be tracked through cookies and other internet technology and then analysed to help businesses better understand their target market – and this sort of market segmentation is becoming increasingly granular.

Is price discrimination legal?

There's no law against retailers charging different prices to different people for the same product, but there used to be one under the original Trade Practices Act in 1974. It was repealed in 1995 on the grounds that it was anti-competitive.

The collection of personal information (any information that identifies you), however, needs to comply with the Privacy Act. While that would include information collected by loyalty programs, the Office of the Australian Information Commissioner (OAIC) explains on its website that "the information collected by online advertisers may often not be sufficient to identify you; it might just be general information about your interests and sites you have visited. So companies using Online Behavioural Advertising may not need to comply with the rules in the Privacy Act about how personal information is handled".